On 9 April 2014, the European Commission adopted its new Energy and Environmental State Aid Guidelines (the "EEAG") which will take effect from 1 July 2014 onwards, replacing the Environmental State aid Guidelines ("EAG") from 2008, which did not cover State aid to the energy sector. The EEAG set out the Commission's policy on the compatibility of public support for environmental and energy sector related measures under EU State aid provisions.

The main changes set out in the EEAG are:

Aid to renewable energy will focus more on market-based mechanisms. This will involve the gradual phase-out of feed-in tariffs – which are perceived by the Commission as highly distortive of competition – to make way for more market-based types of aids such as feed-in premiums. The premiums will not apply when the prices on the market are negative, so that generators have no incentive to generate electricity under negative prices. The EEAG also foresee mandatory bidding processes, in which new electricity capacity from renewable energy sources would be selected in a competitive bidding process, so that the amount of aid can be reduced as much as possible. The tender process will be gradually introduced from 2015, with smaller installations initially exempted, but will be obligatory for all new installations as of 2017.

65 energy-intensive sectors competing outside the EU could benefit from reductions in the charges levied for the funding of renewable energy support, which make up an increasing proportion of industry's energy bill. The measures predicted by the EEAG aim to release the burden on the energy-intensive industries that are exposed to international competition. In addition, energy intensive undertakings may continue to enjoy exemptions from harmonized and non-harmonized environmental taxes.

Aid for cross-border energy infrastructure: There is guidance on permissible aid for developing, modernizing and upgrading cross-border networks (e.g. smart grids or infrastructure investments in assisted regions), which contribute to completing the internal energy market. An important element is that projects should be open to third parties, subject to tariff regulation, and contribute to the Union's security of energy supply.

Aid for so-called "capacity mechanisms" is possible, but only if the Member State demonstrates that adequate capacity cannot be delivered in the absence of State intervention. The mechanisms should reward only the availability of capacity and not the sale of electricity and be open to generation capacities from other Member States.

The EEAG were adopted in principle on 9 April 2014. The formal adoption will follow. The currently published version, therefore, is for information purposes only and without prejudice to the authentic texts that will be published in the Official Journal later.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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